Berlusconi Cites Debt Crisis in Fight to Survive: Euro Credit

Dec. 13 (Bloomberg) -- Silvio Berlusconi’s fight for his
political life enters its final round today with the Italian
premier using the European debt crisis as a shield.

“We could become targets of international speculators like
Greece, Ireland and Portugal, a tragic risk with disastrous
consequences,” Berlusconi told supporters in Naples on Dec. 5.
“The ratings agencies have confirmed our top rating but have
said that it’s conditional on maintaining political stability.”

Lawmakers in Rome began debating a no-confidence motion
today and the voting, scheduled for tomorrow, will determine
whether Italy’s richest man can sustain his government, whose
term has two years left. The yield premium on Italy’s 10-year
debt over comparable German bunds more than doubled this year,
reaching a euro-era high of 212 basis points Nov. 30. It was at
157 basis points today as of 9:45 a.m. in Rome.

Berlusconi, addressing the Senate today, said he’ll seek to
enlarge his majority in parliament by forming a new government
supported by “all moderates,” if he wins the confidence votes.
He called for a “pact” that includes “renewing the program
and the composition of the government.”

A loss for Berlusconi may lead to early elections or
wrangling to form a new coalition. Prolonged political unrest
threatens to shift investor focus to Italy, which has so far
weathered the market decline better than Spain, Portugal and
Ireland, maintaining the lowest risk premium of the four.
Standard & Poor’s, in reaffirming Italy’s A+ credit rating on
Nov. 2, said political instability was one of the biggest risks
to the country’s creditworthiness.

Unclear Future

“The biggest risk from an investors’ point of view is that
we jump into new elections and we get an unclear outcome in
terms of a solid, working majority,” said Vladimir Pillonca, an
economist at Societe Generale SA in London.

Under Italian law, elections aren’t automatic. If
Berlusconi, 74, wins, he’ll have a shaky parliamentary majority
after the defection in July of a key political ally, Gianfranco
Fini, which led to the leadership challenge. If he loses,
President Giorgio Napolitano will have to consult all parties to
form a government, including a new one led by the incumbent.

With debt of more than 1.75 trillion euros ($2.3 trillion),
Europe’s biggest in nominal terms, any credit-rating downgrade
or widening of bond spreads has a bigger effect on Italy than on
other so-called peripheral nations.

A 100 basis-point jump in funding costs in the next two
years would add 0.4 percentage point of gross domestic product
to the budget deficit in 2011 and 2012, Pillonca estimated in a
Dec. 9 report. That’s almost twice the impact on Spain’s
deficit, he wrote. Italy needs to sell more than 220 billion
euros of bonds next year, the most in the euro region.

Fini’s Break

The cost of insuring Italian debt against default rose
almost 70 basis points to 204 since Fini, speaker of the lower
house of parliament and co-founder of Berlusconi’s ruling People
of Liberty Party, broke with the premier five months ago and
began campaigning for his ouster. Fini has the backing of at
least 35 members of Parliament’s lower house, enough to deny
Berlusconi a majority.

Tensions between the two deepened after Berlusconi admitted
to phoning police to check on a 17-year-old nightclub dancer who
was arrested for theft. The girl, who had attended parties at
his Milan mansion, was released into the custody of his former
dental hygienist and now a local politician from his party.

As the vote approached, some lawmakers have abandoned the
effort to end Berlusconi’s 16-year political career and promised
to back the premier.

Call for Investigation

The decisions have prompted Pier Luigi Bersani, head of the
Democratic Party, and Antonio di Pietro, leader of the Italian
Values Party, to call for prosecutors to investigate vote
buying. Berlusconi denies the allegations and predicts he will
carry the confidence vote.

“A week ago, just computing the votes, a fall of the
government was given as probable,” said Matteo Regesta, a
fixed-income strategist at BNP Paribas SA in London. “It isn’t
the case today.”

Prior to Berlusconi’s entry into politics in 1994, Italy
had averaged more than a government a year since World War II
and investors had shown tolerance with the shifting political
winds. Since the start of the euro in 1999 until the beginning
of this year, Italy’s risk premium over Germany averaged 35
basis points, less than a quarter of the current level.

Extraordinary Times

“We are living in extraordinary times in which past
history is not very useful,” Regesta said. “In the past,
coalitions with opposing strategies would have had little impact
on such a huge and liquid market like Italy’s. Given the current
stress in euro-government capital markets and given also the
closer attention players are giving to balance sheets, to
budgets, to fiscal projections,” that may no longer be the
case, he said.

One reason Berlusconi’s political woes haven’t had more
effect is that all parties agreed to pass the 2011 budget before
the confidence vote. The spending plan, which didn’t need the
kind of wage cuts and tax increases implemented in Spain,
Portugal, Ireland and Greece, aims to bring the deficit down to
3.9 percent of GDP next year from 5 percent this year. That
compares with 6.4 percent for Spain in 2011, 4.9 percent for
Portugal and 10.3 percent for Ireland.

Italy’s finances got a vote of confidence on Dec. 10, when
European Economic and Monetary Affairs Commissioner Olli Rehn
told lawmakers in Rome that the EU didn’t expect Italy would
need additional budget-cutting measures in 2011, though the EU
would be “rigorously monitoring” the country’s finances.